Valuing an apartment building in Los Angeles is part science, part market knowledge. Whether you're a first-time buyer or an experienced investor reviewing a new acquisition, understanding the mechanics behind multifamily valuation will make you a sharper underwriter — and a better negotiator.
The Income Approach: The Primary Method
Unlike single-family homes, apartment buildings are valued primarily on their income, not on comparable sales alone. The core formula is:
Property Value = Net Operating Income (NOI) ÷ Cap Rate
The market cap rate is determined by comparable sales — what buyers paid relative to the income on recently sold properties. In Los Angeles, a buyer's first job is figuring out what cap rate the market is assigning to a given submarket and asset type, then applying it to the subject property's income.
Step-by-Step: Calculating Value
Start with Gross Scheduled Income (GSI)
Add up the total annual rent if every unit were fully occupied at market rate. This is your gross potential — not your actual income. For rent-controlled buildings, understand the spread between current in-place rents and market rents; this delta is your value-add thesis.
Apply a Vacancy and Credit Loss Factor
Los Angeles vacancy rates for well-located multifamily assets typically run 3–7%. For older or rent-controlled buildings with more tenant turnover complexity, buyers often underwrite 5–8%. Subtract this from your GSI to get Effective Gross Income (EGI).
Calculate Operating Expenses
Common operating expenses include property taxes, insurance, property management (typically 5–8% of gross rents in LA), maintenance and repairs, utilities (for common areas or owner-paid units), landscaping, and reserves for replacement. LA's Measure ULA transfer tax is also a significant transaction cost sellers must account for on properties above $5M.
Arrive at Net Operating Income (NOI)
NOI = EGI minus all operating expenses. This is the number buyers underwrite. Note: debt service is NOT included in NOI — it's a pre-financing metric, allowing you to compare properties regardless of how they're capitalized.
Divide by the Market Cap Rate
Once you have NOI, divide it by the prevailing cap rate for that submarket and asset class. If comparable properties are trading at a 5.0% cap rate and your property generates $200,000 NOI, the indicated value is $4,000,000. Small changes in cap rate assumptions create large swings in value — a 0.5% spread on a $4M asset is $400,000.
What LA Buyers Actually Scrutinize
The Rent Roll
Every serious buyer will ask for a current rent roll showing each unit, its tenant, lease expiration, current rent, and market rent. The spread between in-place rents and market rents — and how quickly a buyer can close that gap — is the core of any value-add underwriting thesis in Los Angeles.
Rent Control Status
In LA, buildings built before October 1, 1978 are typically subject to the Rent Stabilization Ordinance (RSO). Buildings subject to RSO have annual rent increase limits (currently tied to the Consumer Price Index), which constrains income growth. Post-1978 buildings fall under state AB 1482 — which allows up to 5% + CPI annually (capped at 10%). Buyers pay meaningfully different cap rates for RSO vs. non-RSO assets.
Operating Expense Verification
Sellers sometimes present "proforma" expenses that understate actual costs. Experienced buyers request two to three years of operating statements to verify actual expenses — particularly property management, maintenance, and utility costs. Significant discrepancies between offered numbers and actuals are negotiating leverage.
Sales Comps: The Secondary Check
While the income approach drives multifamily valuation, comparable sales provide a reality check. Looking at price-per-unit and price-per-square-foot for similar buildings in the same submarket gives you a sense of where the market is pricing assets independent of income — useful when dealing with significantly below-market or above-market rents that might distort the income approach.
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Let's underwrite it together
Understanding valuation theory is the first step. The next is applying it to a specific asset in today's market. I work with buyers and sellers across Los Angeles — bringing detailed market knowledge to every transaction.
Contact SandraSandra Majarian | CA DRE License #02249098
Marcus & Millichap | Los Angeles, CA